With Ambitions Lowered, Dubai Aerospace Mulls Merging Assets

Dubai Aerospace Enterprise said on Monday it is in talks with the U.K.’s BBA Aviation to merge some assets. If media reports are to be believed, DAE’s Arizona-based business StandardAero, an aviation maintenance and repair company, purchased in 2007, could be at the center of such a transaction.

While details are still sketchy, such a deal for DAE could mean it generates some return on an asset it purchased in the pre-crisis years, mirroring a similar trend for other Dubai-related entities.

“They overextended, they had big ambitions, but that is Dubai,” said a corporate banker who has been working closely with DAE for many years. “Obviously, the revenue flows became constrained and its business model wasn’t as relevant anymore as it would be in an expanding economy,” the person said.

Awash with cash, the Dubai government in 2006 set up DAE, an aircraft leasing and services company that planned $15 billion in investments to help build the emirate into a regional and international aviation center.

The global economic crisis forced the emirate to scale back, and in many cases put on hold, ambitious plans until the business climate improved. Many of Dubai’s state-backed entities agreed to postpone repayments of debt for which they would have to sell assets.

Backed by the likes of Investment Corporation of Dubai, a government vehicle that owns several flagship companies including the fast-growing Emirates Airline, DAE embarked on an aggressive spending spree: soon after its launch it bought two companies that service aircraft, StandardAero Holdings Inc. and Landmark Aviation, from private equity firm Carlyle Group in a $1.8 billion deal. Zurich-based SR Technics was sold in a $1.3 billion deal to a consortium including DAE in 2006 but is now fully owned by Abu Dhabi sovereign fund Mubadala.

DAE also made an unsuccessful, near $2 billion bid for an airport in New Zealand and pledged to spend $27.2 billion on aircraft from both Airbus and Boeing, orders that were slashed in the following years.

The company also went through a management overhaul and agreed with its creditors to replace a loan that was set to expire in 2011 with a new, four-year facility. Earlier this year, DAE said it made a full-year net profit of $7.3 million on revenues of $1.94 billion.

“The focus is now to be a steady, state business and not expand it too much, to manage their debts and to have taken the steps to stop the bleeding as much as possible,” said the banker who has worked closely with DAE over the years.

DAE’s plight doesn’t mean Dubai’s quest to make aviation a central pillar of its economy will be derailed. The emirate’s main airport is already the world’s second-busiest for traffic and it plans a second major hub to tap the ever-expanding global aviation market.

But it may need to adopt a more cautious and careful approach, said Andrew Charlton, managing director of Aviation Advocacy, an industry consultancy firm.

“The strategy is right, Dubai was trying to capitalize on the fact it is a major transit hub and to position itself at various places on the value chain, such as engineering and catering,” Mr. Charlton said. “But these businesses are always peripheral to what your average airline does and that made it slightly less obvious that what they’ve done should have been a roaring success.”